Public Sector Property

19.10.18

CIPFA warns councils against exposing public money to risk in commercial property investment

Councils have been warned not to expose public funds to “unnecessary or unquantified risk” when borrowing to invest in commercial property in a statement from CIPFA.

In a joint statement, CIPFA chief executive Rob Whiteman and Richard Paver, chair of the CIPFA Treasury and Capital management panel, reminded councils that the prime objective of a local authority’s treasury management investment activities is the security of funds.

This follows concerns about the practice of councils borrowing to invest in commercial property disproportionately to their resources, which the institute says is unlikely to be consistent with the requirements of the Prudent Code and Treasury Management Code.

CIPFA shared concerns that there had been an “acceleration of the practice of borrowing to invest in commercial property,” and Whiteman and Paver said that “in some cases these investments have been financed by borrowing.”

They also said that the CPIFA code and the statutory guidance issued by the Minister of Housing, Communities and Local Government were “very clear that local authorities must not borrow more than or in advance of their needs purely in order to profit from the investment of extra sums borrowed.”

CIPFA warned that investment powers “must be used reasonably and in accordance with an authority’s primary function as a service provider.”

CIPFA will issue guidance setting out the “substantial risks” being incurred by these commercial practices and, in the meantime, councils are advised to focus on their requirements to compile a capital strategy.

They were also directed to regard the Statutory Investment Guidance, which cautions local authorities against becoming too dependent on commercial income, taking too much debt relative to net service expenditure, and taking on debt to finance commercial investments.

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Image credit - LPETTET

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